Re Revised Drafts of new s. 221 of Income Tax Assessment Act and of Income Tax (War-Time Arrangements) Bill 1942

JOINT OPINION

We have had submitted to us revised drafts of the new s. 221 which it is proposed to insert in the Income Tax Assessment Act and of the Income Tax (War-Time Arrangements) Bill 1942, and are asked to express an opinion on their validity, further to the joint opinion furnished by us on 26 April 1942,¹ with reference of course to an earlier draft of these Bills.

The general conclusion expressed in our former opinion was that—subject to certain suggested modifications—the proposed measures (i) for giving to the payment of Commonwealth income tax priority over State taxes; (ii) for transferring to the Commonwealth during the war period the entire function of collecting income tax; and (iii) for granting financial assistance during the war period to any State on condition of its withdrawal from the income tax sphere, were all constitutionally valid. So far as concerns the revised Bills, we may say at once that the alterations have served only to strengthen this conclusion and to remove the difficulties we formerly felt. It may be useful however if we address ourselves in more detail to the several provisions which have been modified in the course of revision.

Proposed new s. 221 of the Income Assessment Act.

It should perhaps be noted that proposed new s. 221 of the Income Tax Assessment Act has been altered to confer on every payment of Commonwealth income tax during the war period priority over a debt due to a State in respect of State income tax, irrespective of the date at which the relevant notice of assessment to Commonwealth tax is or was received by the taxpayer. The effect of this change is that where in respect of any year of income prior to 1 July 1942 Commonwealth and State income tax is still unpaid when s. 221 comes into operation, the section will operate to give priority to the Commonwealth debt. In the earlier draft, new s. 221 gave priority only where the Commonwealth assessment was received by the taxpayer before 31 March in the year following the year of income.

Since this extension of the priority given by new s. 221 was in substance proposed by ourselves in our former opinion we should perhaps state our opinion that it does not in any way impair the validity of the section, whether it is to be supported upon the taxation power or upon the defence power.

The inclusion in new sub-clause (3) of a statement of the purpose of the new provisions does no doubt link new s. 221 with considerations of defence. We think however that in its present parenthetical form it wears something of the air of an after-thought. We recognise on further consideration that the draft statement introductory to the whole new section which we suggested in our former opinion does not fit neatly into the structure of the section itself. We venture however to express a continued preference for a statement of purpose at the commencement of the new provisions. We think moreover that the words we formerly suggested could well be made more specific in their mention of defence considerations. We therefore propose for further consideration that new s. 221 should be introduced by some such sentence as the following:

For the better securing to the Commonwealth of the revenue required for the efficient prosecution of the present war, the following provisions shall have effect:

The last phrase of proposed new sub-cl. (3) will no doubt be altered to read ‘the day on which His Majesty ceases to be engaged in the present war’. We assume that an alteration consequential upon the insertion of new sub-cl. (3) has been made in cl. 27 of the Bill.

On further consideration we think it is probably necessary to deal in a more specific and elaborate way than has been done in proposed new s. 221(2)(a) with the effect upon the operation of s. 84 of the Bankruptcy Act 1924–1935 of the new priority given to Commonwealth income tax. The effect of new s. 221(2)(a) appears to be to insert a new item in the fourth place in an existing list of eight classes of debts, which otherwise by virtue of s. 84(3) of the Bankruptcy Act rank equally among themselves and in the event of a deficiency abate equally. Questions of difficulty seem to us to arise for instance (i) if there are sufficient assets to pay in full the debts referred to in paragraphs (a), (d) and (e) of s. 84(1), but not Commonwealth income tax as well; (ii) if there are sufficient assets to pay in full those three classes of debts and Commonwealth income tax as well, but not the debts referred to in the subsequent paragraphs of s. 84(1), viz. pars. (f), (g), (h), (i) and (j). In the former case, does s. 84(3) operate, but on these four classes of debts only? If not, a priority of a new type is conferred on the debts referred to in pars. (a), (d), and (e). In the latter case, does s 84(3) again operate, but in respect of the last five classes of debts only? If so, again a priority of a new type is given not only to Commonwealth income tax but to the debts referred to in pars. (a), (d) and (e).

In the proviso to new s. 221(2)(b) we think that the word ‘unsecured’ has been inadvertently omitted from the phrase ‘all debts due to the Crown in the right of that State’. The general intention of the proviso appears to be that the Commonwealth will give to debts of the classes referred to in pars (a), (d) and (e) of s. 84(1) of the Bankruptcy Act the same priority as the State gives. But as drawn the clause permits the priority to be given only if the State law prefers debts of the classes mentioned to all debts due to the Crown (State). Given the literal effect, this wording would in effect nullify the proviso. For the priority legislation in the States deals not with all debts but only with unsecured debts.

The Income Tax (War-Time) Arrangements Bill

(6)  On further consideration of cl. 4 in the revised Bill, it has occurred to us that it might possibly be suggested that the clause involves a contravention of s. 99 of the Constitution, inasmuch as under it the Treasurer could, if he thought fit, deprive one State of its income tax staff whilst leaving unaffected the similar staff of another State. As stated in our former opinion, we are inclined to think that s. 99 of the Constitution may apply to an exercise of the defence power. As to the scope of s. 99 the High Court has been far from unanimous; see e.g. Elliott v. Commonwealth 54 C.L.R. 657. But we do not think that this clause involves any contravention of s. 99. First, because it does not appear to us to be properly described as a ‘law of revenue’ within the meaning of the section. Secondly, because it does not appear to us to ‘give a preference’ to any State, in any sense relevant to s. 99. Plainly, it does authorise differential treatment of the States. But in view of the provisions of cl. 17 of this Bill, it would be a matter of some nicety to decide whether ‘preference’ was given to the State whose employees were compulsorily transferred to the Commonwealth or to the State whose employees were left on its hands; cf. The observations of Latham C.J. in Elliott v. Commonwealth 54 C.L.R. at pp. 669–670.

While fully sharing the view expressed by Messrs E.M. Mitchell and A.R. Taylor that words should be inserted in this Bill to make clear the relation of the measure to the defence power, we think some further consideration should be given to the manner in which this object can best be achieved. One method would of course be to link up with considerations of defence each clause of the Bill which is thought to depend on the defence power. Another would be to cover the whole matter by appropriate recitals in a Preamble. In the schedule of proposed modifications which we later forwarded in support of our former opinion, we adopted the former method, and it appears that in substance our specific suggestions have been incorporated in cll. 4 and 11 of the Bill. Whether in addition a Preamble is required would we think depends on whether there are any other clauses in the Bill that depend on the defence power. In our opinion there are not. Clauses 12 and 17 are no doubt dictated by war conditions, but both clauses are in our opinion properly to be treated as resting upon s. 96 of the Constitution. In the case of s. 12, support could be obtained also from the taxation power and from the borrowing power. The remaining clauses of the Bill are in our view either incidental to cll. 4 and 11 or dependent on the taxation power.

If a Preamble is not required to link with the defence power clauses otherwise unsupported, we think the repetition of the emphasis on considerations of defence is unnecessary, and perhaps even undesirable, as creating an impression that the Commonwealth ‘doth protest too much’.

If it is desired to retain the Preamble, by way of some additional protection, it has occurred to us that possibly it might be strengthened a trifle by altering the first recital to read as follows:

Whereas with a view to the defence of the Commonwealth and of the several States and in particular with a view to the more effectual organisation of the community and the more efficient prosecution of the war in which His Majesty is engaged.

In cl. 5, we note that the draftsman has adopted in the course of revision a suggestion put forward in our former opinion for the omission of the first sub-clause in the earlier draft, but not a further suggestion that the retransfer of officers to the State service at the end of the war might be made to operate at the option of the State. Our only reason for the suggestion was that it might serve to remove the foundation for an argument that not even under the defence power could the Commonwealth compel a State after the war to re-engage a servant or officer. We think however that provision for the re-engagement of officers temporarily transferred to the Commonwealth for reasons connected with the war can in any event be regarded as incidental to the main object of the provisions contained in cll. 4–10 of the Bill.

In cl. 9, the word ‘his’ seems to have been omitted inadvertently before the word ‘death’ in the phrase ‘his dependants are entitled or eligible on or after death’.

In the second line of cl. 17(b) a necessary consequential alteration of ‘eleven’ to ‘twelve’ will perhaps have been made already.

We have not hitherto discussed at all the basis adopted in arriving at the amount of the grants payable under cl. 17 to the several States by way of compensation for withdrawal from the income tax field. We take it that the basis has been accurately stated as the average receipts by the several States from income tax during the last two full financial years, 1939–1940 and 1940–1941. It has been stated in the press however that attempts may be made by some States to secure more favourable treatment by the Commonwealth if the uniform taxation scheme is adopted, and it has occurred to us that perhaps we should consider also whether the Commonwealth could safely diverge from the uniform basis of calculation hitherto adopted. In Moran v. F.C.T. 61 C.L.R. 735 (H.C.), 63 C.L.R. 338 (P.C.), the High Court and the Privy Council did uphold the validity of a scheme under which one State (Tasmania) was given a grant under s. 96 on a specially favourable basis, and both Courts held that s. 96 prohibits neither the discrimination that is struck at by s. 51(ii) nor the preference that is struck at by s. 99. But their Lordships also held that circumstances could be imagined in which, under the guise or pretence of assisting a State with money, the real substance or purpose of a Commonwealth Act would simply be to effect discrimination in respect of taxation (63 C.L.R. at p. 350). Applying this proposition to present circumstances it is necessary to consider the effect of a decision by the Commonwealth to give to one or more States a grant under cl. 17 of the Bill more liberal than that now provided for, and on a scale more favourable than that of the others.

In our opinion such a decision would not invalidate the uniform taxing provisions of the scheme. If the Commonwealth were to require that what we may call the ‘surplus’ amounts should be handed back by the State to individual taxpayers, the position would be much more difficult. But so long as the grants made by the Commonwealth under cl. 17 are genuinely grants to the States, to be used by the States for their own purposes, we do not think that mere inequality in the basis upon which they are calculated would of itself invalidate the scheme as a whole. The strong dissent of Evatt J. in Moran’s case, however, and the support given by the Judicial Committee to some of the principles laid down by him, shows that in operating a taxation-cum-grants scheme the Commonwealth is not wholly and in all cases out of reach of the prohibition against discrimination contained in s. 51(ii).